Trading in bitcoin and other cryptocurrencies carries significant risks. Due to the decentralized and largely unregulated nature of the crypto market, it is prone to high volatility and fluctuations, which can lead to significant losses for investors. Added to this, cyberattacks on crypto exchanges and wallets can result in the loss of funds, as there have been numerous instances of hacking and theft in the past.
Government intervention and regulation is another risk, which can impact the value and stability of cryptocurrencies. New investors in the crypto market may be unaware of the technicalities involved in trading cryptocurrencies, which can lead to mistakes and losses. Therefore it is increasingly important for traders to thoroughly understand the risks and to approach trading with caution and a well-informed understanding of the market.
Trading Bitcoin: What Are the Risks?
Volatility
Bitcoin is known for its high level of price volatility, which can lead to large losses if the market moves against a trader’s position. This volatility can also lead to rapid price changes that can be difficult to predict, making it challenging for traders to make informed decisions.
Market Manipulations
Bitcoin’s decentralized nature means that it is susceptible to market manipulations, such as pump and dump schemes, where traders artificially inflate the price of an asset and then sell it for a profit. This can lead to significant losses for unsuspecting traders who get caught up in the scheme.
Security Risks
As a decentralized asset, Bitcoin is stored in digital wallets, which are vulnerable to hacking. If a hacker gains access to a trader’s wallet, they can steal their Bitcoins and there is no way to recover them.
Liquidity Risk
Bitcoin is still a relatively new asset, and its market is not as developed as more established financial markets. This can lead to low liquidity in some exchanges, making it difficult for traders to enter or exit positions when they want to.
Regulatory Risk
Governments around the world are still figuring out how to regulate cryptocurrencies, and this can lead to changes in laws and regulations that can impact the trading of Bitcoin. For example, some countries have banned cryptocurrencies, while others have imposed strict regulations that can make it difficult for traders to operate.
Technical Risks
The technology behind Bitcoin and other cryptocurrencies is complex and can be challenging to understand, even for experienced traders. This can lead to technical errors, such as sending Bitcoin to the wrong address, which can result in permanent loss of the funds.
Reputation Risk
Bitcoin and other cryptocurrencies have been associated with illegal activities, such as money laundering and drug trafficking. This negative association can impact the reputation of the asset, leading to lower demand and lower prices.
Regulations Surrounding Bitcoin Trading in the UK and US
With the growing popularity of cryptocurrencies, governments are implementing regulations to govern their usage. Keeping track of the ever-changing crypto regulations across various countries can be very challenging.
We’ve done some research on crypto regulations in the US and UK and how they may affect your trading experience.
Crypto Regulations in the United States
Cryptocurrencies are not considered legal tenders in the United States, however, cryptocurrency exchanges operate legally. Their regulation may, however, differ from state to state.
In the US, despite the lack of a uniform state-level legal approach, the development of federal cryptocurrency legislation continues. FinCEN views cryptocurrencies as not being legal tender but considers cryptocurrency exchanges as money transmitters, as the tokens can substitute for currency. Meanwhile, the IRS does not classify cryptocurrencies as legal tender but defines them as digital representation of value that acts as a medium of exchange, a unit of account, and/or a store of value, and has provided tax guidance accordingly.
Crypto Regulations in the United Kingdom
Cryptocurrencies are not considered legal tenders in the United Kingdom. Similar to the states, exchanges are legal but they must meet the requirements of the FCA.
The UK has adopted a balanced approach to cryptocurrency regulations, without any specific laws for the same. Cryptocurrencies are not recognized as legal tender, however, exchanges need to comply with registration requirements. The tax treatment of cryptocurrencies has been outlined by HM Revenue & Customs (HMRC), stating that their taxability depends on the activities and parties involved, as they cannot be compared to traditional investments or payments. Nonetheless, gains or losses from cryptocurrencies are subject to capital gains tax.
